Most debt mutual funds in India operate within regulatory limits on their exposure to a single sector, issuer group and issuer. These limits are important because they prevent excessive concentration and protect investors from risks they may not have intended to take.
The trade-off is that when a particular sector offers attractive yields or spreads, conventional debt funds have limited ability to increase their exposure meaningfully. A money market or short-duration fund, for instance, cannot simply take a large position in one sector even when its bonds offer compelling relative value.
